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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: jeffbas who wrote (5909)	1/31/1999 11:13:00 AM
From: Joe Dancy	Respond to of 78476

I'm not so sure Jeff I agree with your analysis - but then again I've been wrong before :). I do agree that the individual investor tends to gravitate to the "hot" areas - that's just the way most people think who are not value based guys like us. Not that they are right, but a couple of Harvard types just completed a study and concluded the massive cap stuff has done so well over the last decade mainly due to the increasing share of money the institutions control going into the market - and the institutions can't get their boats into the shallow water surrounding small cap stocks. I wrote this last week for the IFC site on SI, but then again maybe it is just wishful dreaming :): ** Why the vast differential in performance? Harvard professors Andrew Metrick and Paul Gompers recently completed a study that indicated that much of the dominance of large cap stocks was due to the increasing share of the equity market controlled by institutions. Institutions had a 30% share in 1982 - increasing to around 50% in 1997. But some claim that after growing strongly for the last 15 years the share of equities controlled by institutions in the market may have stabilized. In 1998 "we completed the transition from institutions to individual investors," said Laszlo Birinyi, a research consultant and money manager in Greenwich, Conn. On the New York Stock Exchange, Birinyi noted that $63 billion of net buying was in blocks of $10,000 or less. In comparison, $44.7 billion was in "big-block" trades. "It's the people standing in Charles Schwab who are running the show," he said. On-line trading has exploded as individuals are beginning to take responsibility for investment decisions. * Individuals Drive Small Cap Market And this fact is not insignificant. For a variety of reasons - including restrictions on what percentage of a company's outstanding stock such investors can hold - only a tiny amount of institutional ownership is in small caps. This has hurt the performance of small caps by reducing the demand for them relative to large cap stocks. But if the share of the market controlled by institutions stops growing as Birinyi noted, small caps could outperform larger companies for quite some time. And compared to large caps, the small cap returns could be quite impressive. And make no mistake, individual investors, many trading on-line, are making an impact on some sectors of the market - especially Internet related companies. If on-line investors move past their current obsession with this segment, and invest in more traditional technology small cap plays that display growth characteristics and reasonable valuations, the small cap sector could do quite well. Newsletter publisher Mark Hulbert recently noted: "The good news for small-cap investing is that this trend [of increasing institutional ownership] can't last forever. And when it stops, or reverses, large caps will no longer enjoy their performance advantage. No one can pinpoint when this will happen, but the longer it takes, I believe, the stronger the small caps' subsequent performance." * Small Cap Indicators At Record Undervalued Levels One wildly bullish indicator for small cap stocks is the relative price-earnings ratio of the T. Rowe Price New Horizons fund to that of the S&P 500. The New Horizons fund is widely regarded as a proxy for the small cap sector. New Horizon's estimated relative price-earnings ratio is sitting at a 38-year low in relation to the S&P 500's price-earnings ratio - meaning that the small cap sector is grossly undervalued. Another indicator that can be used to evaluate the small cap sector is the ratio of the Russell 2000 index to the S&P 500. This ratio is at a 12-year low, signaling a compelling case for smaller companies. "I think small and mid-cap stocks are going to have a tremendous year in 1999 because we're coming into this tremendous undervaluation," says Richard Driehaus, President of Chicago-based Driehaus Capital Management Inc. Gerald Perritt, who holds a doctorate in mathematics and has spent years tracing small-cap returns, also likes the outlook for small cap stocks. He figures that small caps have added an additional 6% annual return over the past half century when matched against the stock market in general, unexplained by risk factors alone. Assuming a relatively efficient market, small-cap stocks must outperform large caps over the long term in order to reward investors for the greater risk and lower liquidity. Further, the recent market strength has been led by technology, which has tripled as a percentage of the gross domestic product over the last seven years according to well-known Wall Street analyst Abby Joseph Cohen. She noted that U.S. exports increasingly consist of high-technology products that are not easily duplicated - and are often sought-after - thereby insulating the U.S. economy from some of the global instability.